One of the biggest fears of the dividend investor is that a company with an attractive-looking yield will cut its distributions to shareholders. While there are certain early warning signals on a company level that may indicate that the risk of a dividend cut is high, investors should also be aware that the risk of a distribution cut is higher in some industries than it is in others.

To understand this phenomenon, it is important to realize that some industries are more cyclical than others. What this means is that during recessions, some industries (e.g. many grocery goods) won’t see demand drop as much as others (e.g. housing) will. As such, during long periods of economic malaise, companies in stable industries are better equipped to maintain dividends.

Furthermore, the cost structure of an industry will also dictate a company’s ability to steadily manage its dividends. When demand drops (as it invariably does during recessions), companies with high fixed-costs will find themselves bleeding cash, while those with flexible cost structures can quickly and easily bring costs down such that they are back in line with revenues, reducing the risk that dividends will have to be cut.

As an example of how important an industry’s role can play in determining a company’s ability to pay dividends, consider the airline industry. Demand for air travel is highly cyclical, as recessions cause weary consumers and businesses to scale back travel plans. Further exacerbating this situation is the fact that fixed costs for airlines are high, as aircraft leases cannot simply be cancelled, and labour and equipment costs for a given flight cannot simply be cut (i.e. if a plane is half full or passengers are paying reduced fares, costs cannot be materially reduced to compensate). As such, the profit levels of airlines fluctuate dramatically, resulting in high risks for the dividend investor.

While the risk of a dividend cut for any company in any industry is always present, investors who recognize which industries are the least cyclical, and which have most flexible cost structures, put themselves in a position to avoid a negative surprise when economic troubles occur.
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Saj Karsan is the author of Barel Karsan, a site dedicated to finding and discussing current value investments. Readers can subscribe to the site’s feed here.

I’m not here to teach you how to be a great investor. On the  contrary, I’m here to tell you why very few of you can ever hope to achieve this status.

It doesn’t matter how intelligent you are, how many books you’ve read or how good you are with numbers. The truth is that you may  never be as good as you think.

This was a speech by Mark Sellers of Sellers Capital to Harvard MBA student’s in 2007. It was also one of the handful of good reading material that helped me to look beyond numbers and performance in my early investing career.

It is a speech that helps to expose weaknesses and build on your strengths.

You can read all of Berkshire’s letters, Buffett’s words of wisdom but when it comes to crunch time, why do so many people fail to even beat the market let alone compound their money at extraordinary rates?

7 Investor Traits Needed for Mind-blowing Success

Off the top of my head out of 5 people I spoke to regarding value investing, 3 never understood the concept of buying half dollars and 1 took a while to come around.

So think of the list below as an investors moat. If a majority of the traits is hard wired into your self, it is an advantage that is absolutely sustainable.

The following can’t be learned but I do believe it can be obtained under training and fine tuned to become a formidable competitive advantage over other investors.

(Read the full speech)

Trait #1 – Ability to buy and sell stocks against the market

Everyone thinks they can do this…[when] the market is crashing all around you, almost no one has the stomach to buy.

Trait #2 – Obsession

The second character trait of a great investor is that he is obsessive about playing the game and wanting to win.

Trait #3 – Willingness to learn from past mistakes

What sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them.

Trait #4 – Inherent sense of risk based on common sense

I believe the greatest risk control is common sense, but people fall into the habit of sleeping well at night because the computer says they should.

The thing about common sense is that it isn’t very common.

Trait #5 – Confidence and Conviction

Great investors have confidence in their own convictions and stick with them, even when facing criticism.

Trait #6 – Get both sides of your brain working

If you don’t think clearly, you’re in trouble. There are a lot of people who have genius IQs who can’t think clearly.

Trait #7 – Ability to live through volatility

The most important, and rarest, trait of all.

Reading and analyzing financial statements can be learnt and copied by anyone. The above 7 traits cannot.

This isn’t something you’ve heard the first time, but I believe it to be an awesome and concise reminder in the midst of a huge rallying market we have now.

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Jae Jun is the author of Old School Value, a value investing blog that focuses on fundamental analysis, investment spreadsheets, investment ideas and commentary.

This article by Old School Value originally appeared on The DIV-Net July 5, 2008.
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As one of the few value investors in The DIV-Net so far, I would first like to touch on what value investing is.

Charlie Munger stated it quite clearly. Intelligent investing = value investing.
By value investing, the general population tends to think of it as bottom feeding and being cheap, but such a statement only holds true in a town called Speculatown.

Value investing is much more than buying cheap companies. It’s just like how we all love to find something great in the sale bin and then brag about it to our friends. It revolves around paying less or a fair amount to its real value, referred to as intrinsic value or buying $1 for 50c.

Benjamin Graham, the father of value investing, stated in his book Security Analysis,

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

Without data and reasoning associated with an appropriate price tag, this type of activity should be labeled “Get Rich Quick Like That Guy on TV”.

Speculation is darn easy but value investing is difficult. Difficult because it requires;

1. Patience, patience, patience and more patience
2. Discipline
3. No emotion
4. Going against the crowd
5. Lots of reading and studying

Many great value investors mentioned by Warren Buffett in his famous speech, The Super Investors of Graham and Doddsville, show the track record of these great investors. They weren’t able to beat the benchmark year after year, but their overall records tell the true story.

Seth Klarman clarifies the idea when saying that

“while others attempt to win every lap around the track, it is crucial to remember that to succeed at investing, you have to be around at the finish”.

This brings me to the point of long term buy and hold. While there certainly are opportunities where the market provides short term no brainer investments, a long term buy and hold methodology will allow an investor to look at the horizon, focus on quality businesses and live a life without the computer.

By investing for the long term in quality companies, we are recognizing that we are the business partners.

As an associate member of the Dividend Investing and Value Network, I hope to bring light to great companies and value investing. I am proud to be a business partner and hope to be one with you as well.

If you enjoyed this article, please visit Old School Value and subscribe to his feed.

(Photo: sanja gjenero)

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Corporate ownership and private enterprise have been the buzzwords of developed economies for quite some time. Privatization has been a positive trigger for rallying stock markets all over the world. It was the sign that heralded the readiness of a corporate entity to meet the harsh and demanding needs of the private investor. But what makes a public company a headline stealer? It’s either the fact that the company has made castles in the air real for a multitude or, at the other end of the spectrum, because it has shattered the dreams of millions.

What is the factor that people use to differentiate between one good “investor-friendly” company and another? Great investors have long known that the only real sign of a great company or business is the amount of cash it can generate year after year. For the common investor, a rough estimate of this is the cash dividends that he/she receives on account of owning company stock – the higher the dividend, higher the return on his investment. But what makes a good company a great one?

Let’s look at two famous ones – GE and AT&T. Both companies have maintained the enviable and stellar record of never having missed a year in paying dividends. The icing on the cake for the investors in these two enterprises is that the dividends have been on the upward trend, continuously increasing from start to now. But the difference between these two and other companies lies not in the amount of dividends paid, but in the “Dividend Decision” itself.

The big question is – how much of the company’s cash earnings should be distributed as dividends? AT&T has always paid out more than 60 percent of its per share earnings and GE has sent out at least 35 percent year after year. Now the question arises – why don’t other companies follow the path that these two have chosen?

Classic theories state that the dividend decision taken by the Board of Directors takes into account all investment opportunities and then allocates capital to a place where it will hopefully earn a better return than it would if it were paid out as dividends. In simpler terms, it means that the company will pay out dividends only if it cannot find a new project or opportunity which would offer higher returns than cash invested elsewhere.

GE as a corporation operates in an industry where innovation can bring about or create a brilliant new chance to rake in the dollars. While AT&T pays out more because, in an aging industry where growth rates are nearing lower single digits, it cannot invest the money it generates to deliver better returns, GE can afford to retain its earnings and invest so that the pace of creating shareholder value is higher than the average alternative.

Coke and Warren Buffett have been in a similar marriage since 1988. Coke has an excellent record, just like GE and AT&T. But why did Buffet make more money than everyone else? In 1988, he bought Coke at an average of $4.75 per share. Today, the cash dividends alone amount to $1.52 per share. That’s a cash return of 32 percent every year. And as long as Coke increases its dividend payout, Buffett only becomes richer and richer, at an increased pace.

To put it in a nutshell, if the stock markets didn’t exist, the only way an investor could earn from an investment is through dividends. It has thus become of utmost importance to find save haven in dividend-paying companies during the markets’ troubled times.

Sarah Scrafford is an industry critic, as well as a regular contributor on the subject of entrepreneurial finance. She invites your questions, comments and freelancing job inquiries at her email address: sarah.scrafford25@gmail.com.